Middle-class Canadians who turn to the justice system risk being wiped out financially by a "loser-pay" costs system that urgently needs reform, a growing number of judges and lawyers say.

Middle-class Canadians who turn to the justice system risk being wiped out financially by a "loser-pay" costs system that urgently needs reform, a growing number of judges and lawyers say.

The system, which began in England more than 700 years ago, has long been seen as a way of improving access to justice because the winner in a courtroom showdown can recoup some or all of their legal expenses from their opponent.

But with cost awards tied to lawyers' hefty fees and the number of hours spent on cases, these awards frequently stretch into tens and hundreds of thousands of dollars.

Britain's highest-ranking judge has described cost awards as the "Achilles heel" of justice.

Justice Dennis Lane of Ontario's Superior Court of Justice says the system, partly aimed at deterring people from bringing baseless lawsuits, is "ruinous."

"I have difficulty with the proposition that in order to deter some frivolous lawsuits, we saddle people who have the misfortune to lose an arguable case with sums of money that can be two or three times the average income of an employed person," Lane said in an interview.

"I don't know that we ought to be in the business of discouraging people from turning to the courts because they fear the financial consequences of losing. That's why we exist. We exist so they can pursue their legal rights."

In Canada, costs are awarded to the winner in most civil cases, although usually not the full amount requested. Courts are guided by case law in awarding costs, but they have complete discretion in determining the final amount. In rare cases that raise important public issues, judges sometimes choose not to award any costs.

Courts have lately fixed principles aimed at ensuring cost awards are "fair" and "reasonable" and in keeping with what the loser could expect to pay. Even so, the awards still soar.

On March 5, the Ontario Divisional Court upheld an award ordering Jazz Air Inc. to pay $160,000 in costs to Porter Airlines for a hearing that lasted just a single day, even though Justice Gladys Pardu noted the amount was "enormous."

And last year, Divisional Court upheld a $610,700 award to lawyers representing plaintiffs in a proposed class-action lawsuit brought against a heart valve manufacturer. The award was a record for a class-action case – and, remarkably, only covered legal costs associated with early, albeit complicated stages of the case, which still has yet to settle or go to trial.

In certain jurisdictions, the usual costs rule has been modified. In British Columbia, for example, costs typically aren't awarded in class-action lawsuits.

The issue of costs has been so troubling that judges across Canada routinely slash bills presented by the winning parties.

"The losing party is not to be treated as a money tree, to be plucked willy-nilly by the winner of the contest," Justice Gordon Killeen of the Ontario Superior Court of Justice said in 2002 after a lawyer presented the court with a $101,766 bill for an eight-day jury trial.

The jury had only awarded his client $155,000 in damages. Killeen decided the lawyer was entitled to $39,673.

Tom Heintzman, a Toronto lawyer and bencher of the Law Society of Upper Canada, said when he discusses the "loser-pay" costs rule with lawyers from countries that don't have legal systems grounded in common law, the response is "amazement."

"People in those countries say to me: `That's a huge barrier to justice. It would never be permitted in our country,'" Heintzman recalled in a paper presented at a recent legal conference.

"The real impediment is the uncertainty of the total costs of the action."

People who want to challenge the government or other institutions with deep pockets incur the greatest risk, Lane said. Three years ago, he raised concerns about the loser-pay system in a case that pitted a Toronto investment company against the Bank of Nova Scotia.

Lane ruled for the banks, but would not award the full amount it sought in costs, including $64,200 for an expert witness. If costs were set in the normal manner, the bank would have been entitled to about $240,110 as partial repayment. Lane allowed $100,000, including $34,200 for the expert.

"What middle-class person would dream of financing an action, however meritorious, against an opponent capable of spending the sums illustrated by the bill of costs of the bank, when the penalty for losing is financial disaster?" Lane asked in his judgment.

But while cost awards can be ruinous and "frightening," litigation could be even more financially disastrous if there was no chance of the winner being able to offset expenses through an award, said Toronto lawyer Mark Orkin, author of a leading textbook on the subject.

Lane said moving to a more predictable "fixed"-costs system might be an option. At present, costs are generally tied to how much the winner has spent on lawyers, he said.

A fixed-costs system was introduced in England and Wales three years ago for personal injury cases involving damage claims of less than $30,000 Canadian.

For example, if a person sues for injuries from a traffic accident and wins, they would get a base fee of $1,600 for legal expenses. In out-of-court agreements, legal costs end up as a percentage of the settlement.

Plans are to expand the system to other kinds of cases, including defamation, and to set fixed fees for expert witnesses, said Robert Musgrave, chief executive of the Civil Justice Council of England and Wales.

Heintzman has suggested limiting costs to no more than 30 per cent of the total recovered by the winning party in a case.

He says another option is to allow litigants to serve opponents with a "no-costs notice" at the outset, offering to have claims tried without any costs being awarded against the losing party.

Perhaps even more radically, Heintzman suggests lawyers outline a budget for clients, spelling out estimated costs of the proceeding, to "bring home" the economic consequences. At the end of the case, the losing party could ask a court to award costs based on the lawyer's initial estimate.

"The justice system is losing customers because the costs are too unpredictable and are potentially out of proportion to the amount in issue," he said.

"Other businesses and institutions tell their customers the cost of using them, so why shouldn't the justice system?"

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